Oil recovers from a nearly 16-month low under $58

Data shows rise in U.S. crude supply, but mixed figures on products

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed higher Wednesday, lifting the benchmark contract above a nearly 16-month low as traders weighed news of a refinery snag and prospects for an output cut among key producers against the first climb in U.S. crude supplies in five weeks and hefty levels of petroleum-product inventories.

The November contract for light sweet crude closed up 73 cents at $59.41 a barrel on the New York Mercantile Exchange. The contract had reached a low of $57.75, a level it hasn't seen since mid-June 2005.

The supply data offer "some signs for a floor to prices," said Daniel Jester, an economist at Moody's Economy.com.

The figures confirm "the feelings of many OPEC members that there is something of an oil glut in the world today, and offers more compelling evidence for OPEC members to curb production in the next few months," he said in a weekly report released Wednesday.

Overall, the figures "add to the downward pressure on crude-oil prices and put increased pressure on OPEC to curb production," said James Williams, an economist at WTRG Economics.

Saudi Arabia will likely determine the point at which OPEC intervenes in the market to reverse the two-month downward trend, he said. Saudi Arabia's target price for action is probably about $55 per barrel for light sweet crude and the cartel's basket price for crude is already touching that number.

Saudi Arabia's ambassador to the U.S. said Wednesday that he didn't expect OPEC to call an emergency meeting ahead of the next one in December, Dow Jones reported.

Meanwhile, adding support for prices, dozens of workers have been treated for inhaling sulfur dioxide gas at Valero Energy's
VLO, -0.94%
Houston refinery, according to Dow Jones.

But Valero had already announced Tuesday that the 130,000 barrel-per-day refinery would be shut down for about 40 days for turnaround and maintenance starting this month. Previously, it planned a 28-day turnaround, then decided to conduct additional maintenance in other areas of the refinery, it said.

On Tuesday, the November crude contract lost nearly 4% of its value to close at its lowest level in more than a year, pressured by swelling U.S. inventories and doubts that key oil producers will take formal action to reduce supplies in a bid to prop up prices. The contract has lost 6.7% in two sessions.

Oil prices have fallen by some 25% since July, with political tensions surrounding Iran's nuclear program easing and U.S. supplies of crude and petroleum products strengthening.

The per-barrel low of $58 to $57.50 will likely be a "substantial support level" for crude prices, with a "strong possibility that prices will continue a volatile consolidation period," said John Person, president of National Futures Advisory Service.

"The upside may be contained at the $63.50-$64.00 resistance level, he said.

Crude supplies up

Crude supplies rose for the first time since the week ended Aug. 25, up 3.3 million barrels to 328.1 million for the week ended Sept. 29, according to the latest Energy Department data reported early Wednesday. In the last four weeks, they had dropped 8 million barrels, but they're still 6.7% above the year-ago level, according to the data.

The American Petroleum Institute confirmed the increase, reporting a 2.7 million-barrel rise in crude stocks to 325.3 million.

Motor gasoline inventories stocks rose for a seventh week in a row, up 1.2 million barrels to total 215.1 million barrels, the Energy Department's report said. That puts the seven-week tally at an increase of 9.7 million barrels.

In contrast, the API said supplies of the fuel were down 2.8 million to total 217.8 million.

Distillate supplies, which include heating oil, climbed for an eighth week, up 200,000 barrels to 151.5 million, the government data showed. They were down 3 million barrels at 146.6 million, according to the API.

Following the news, November unleaded-gasoline futures rose 4.11 cents to close at $1.4978 a gallon while November heating oil closed up 2.31 cents at $1.677 a gallon.

The Energy Department's reported increases in petroleum-product supplies came despite a decline in refinery utilization to 89.9% of capacity in the latest week from 92.4% a week earlier, the government figures showed.

Gasoline demand over the last four weeks was 3.9% above the same time a year ago, averaging over 9.2 million barrels per day, the Energy Department said.

Meanwhile, crude-oil imports fell by 570,000 barrels per day to average 10.5 million barrels per day last week, the report said.

Pressure and support from all sides

Oil traders had many more issues to mull.

The U.S. Government Accountability Office said Tuesday that even if Iranian oil exports were completely shut off, U.S. and world emergency crude reserves could fill the gap for around 18 months.

The comments "support the approach that there is enough inventory to support any supply side shocks to the energy market," said Alan Plaugmann, a trader at Saxo Bank.

And after last year's active hurricane season, when Rita and Katrina took their toll on production, the current season has all but fizzled out in the Gulf of Mexico.

"The hurricane threat in the Gulf region is also fading, releasing any uncertainty in the markets and adding to the downside even before the end of the season," Plaugmann said in a note to clients.

BP
BP, -1.29%
(BP), however, said it still expects third-quarter production to fall compared to last year's hurricane-pinched quarter.

The oil giant said production would be around 3.8 million barrels of oil a day, down from 3.82 million a year ago. It blamed the fall on divestments, maintenance and operational downtime. See full story.

The firm's Prudhoe Bay field in Alaska was shut down due to leaks in August and is still not running at full capacity.

ConocoPhillips
COP, -1.11%
made a similar announcement of lower third-quarter output on Tuesday.

On the broader political scene, five oil workers have been kidnapped in Nigeria's oil-rich Niger Delta region, the BBC reported on its Web site.

The five individuals -- three Britons, an Indonesian and a Romanian -- were taken prisoner close to Exxon Mobil's
XOM, -0.79%
offices. There has been a spate of kidnappings of oil workers in Nigeria by a group that wants a bigger share of the country's oil revenue to stay within Nigeria.

BBC News also reported Wednesday that 16 oil workers that had been kidnapped in southern Nigeria's delta region have been released. The workers, who all worked for a sub-contractor of Shell
RDS.A, -0.92%
were the second group of a total of 25 men to be released after being taken in a raid two days ago, the report said.

Natural gas climbs

Elsewhere in energy trading Wednesday, natural-gas futures closed higher, even tapping a two-week high of $6.18 ahead of the market's own supply update due Thursday morning.

November natural gas rose 23.6 cents, or 4.1%, to close at $5.995 per million British thermal units.

The Energy Department will provide its weekly update on natural-gas supplies in storage on Thursday. Market estimates call for an increase of 70 billion to 90 billion cubic feet in supplies for last week, Fimat said, pegging its own estimate at a rise of 81 billion.

Analysts at Strategic Energy & Economic Research predict a climb of 77 billion noting that a year ago, supplies rose 45 billion. The five-year average climb is 66 billion, it said.

In equities, benchmarks tracking stocks in the oil and gas sectors rose, with the Amex Oil Index
$XOI
making the largest gain. See Energy Stocks.

And in Wednesday metals trading, gold futures dropped to mark their fourth losing session in a row. See Metals Stocks.

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